Hard assets for hard times

We, in the real estate business, have been working overtime doing market analyses for our customers.

The frustrating part is that sellers do not want to hear what we have to tell them, in other words, that their property is not worth what they think it is and that they have to list lower if they expect to get their property sold.

This was an inevitable reaction to the worldwide economic crisis, which is heavily affecting the US. Real estate values had been inflated in the US for some time and it was only a question of when (not if) their market would turn. That, combined with the decline in the stock market and very tight credit, has made it difficult for many Americans to make discretionary purchases. As much of our buying pool is from within the US, the slowing of our real estate market should surprise no one.

We normally prefer six-monthly intervals to draw statistical comparisons to avoid making long-term judgments based on short-term anomalies. Something that bugs me about the media in general is how they create a big headline out of just a snapshot of information. However, for the benefit of this report, I can tell you that, since October, the number of sales made has declined by 37 per cent and there are 17 per cent fewer sales under contract waiting to close. The market for detached homes is a bit slower and the average sale price is down. The condominium market is slower and the average price is down slightly there as well. Some of the actual percentages are relatively small, but if they were projected over 12 months, there would be significant drops.

What are we looking at in the short-term future? We might be pleasantly surprised. Confidence in the US economy is very low right now. Even those who back President Obama’s social programmes are not all convinced of the soundness of his bail-out policies. Those who have money need to invest it somehow, somewhere. There are a lot of baby boomers in the US – and here in Cayman – who are contemplating retirement and are looking for passive income and a hedge against inflation. But where do they put their savings?

How about the Stock Market? Well, you used to be able to depend on price-to-earnings ratios and good products to choose a good stock. But now it is more often market manipulation by traders and movement by big institutional players, which affects stock prices so it is not the same game anymore. Many people see the stock market as a very unreliable place to park their savings.

What about banks? Well, sure, but the rates for CDs and money market funds are so low that pretty soon we will have to pay them to have them hold our money (don’t laugh!)

So what’s left? There’s real estate. It’s a hard asset, prices are down so future appreciation is all but guaranteed and our market is small and supported by local and foreign purchasers so we tend not to see the drastic lows. By the same token, any influx of foreign money can bring about significant new highs in relatively short timeframes.

Improved resort real estate provides a small return on investment from rental, which approximates CD interest while often allowing owners’ usage as well as future appreciation. Raw land is maintenance-free as it appreciates. Investment real estate gives you a rental return which is higher than CD rates and there is appreciation potential as well. In all of these cases, there is no annual property tax to dilute your return and this is clearly an offshore investment.

What about the long-term? Well, President Obama has already earmarked US$750b for his pet projects in the name of stimulus and it is certain there will be more. This money is a debt that will have to be paid by current and future US citizens, while the money is being used to ensure the continuation in power of the Democrats. If you think that is an exaggeration, have a look at where all that money is going (www.pattonboggs.com). This kind of political pork spending will only further weaken, not strengthen, the US dollar.

The only remedy for the US sick economy is to get back on a sound economic footing. Simply put “don’t spend more than you have” and “don’t penalise people for success”. Only this will create confidence and encourage people to spend. Sadly, under President Obama, that is unlikely to happen and so it will be even more important to own a hard asset going forward. That equates to something that will not blow away in the political winds; something like real estate.